Opinion
CONSOLIDATED Civil Action No. 11974.
Date Submitted: November 6, 1996.
Date Decided: May 13, 1997.
Pamela S. Tikellis, Esquire, and James C. Strum, Esquire, of CHIMICLES, JACOBSEN TIKELLIS, Wilmington, Delaware and Joseph A. Rosenthal, Esquire, of ROSENTHAL, MONHAIT, GROSS GODDESS, Wilmington, Delaware; OF COUNSEL: Lowell E. Sachnoff, Esquire, Duane F. Sigelko, Esquire, and Christine M. Bodewes, Esquire, of SACHNOFF WEAVER, LTD., Chicago, Illinois; David Schachman, Esquire, and Gregory W. Knapp, Esquire, of DAVID SCHACHMAN AND ASSOCIATES, P.C., Chicago, Illinois; Mark C. Gardy, Esquire, and Judith Spanier, Esquire, of ABBEY ELLIS, New York, New York; Scott Fisher, Esquire, of GARWIN, BRONZAFT, GERSTEIN FISHER, New York, New York; Curtis V. Trinko, Esquire, of LAW OFFICE OF CURTIS V. TRINKO, New York, New York; Robert I. Harwood, Esquire, of WECHSLER HARWOOD HALEBIAN FEFFER, LLP, New York, New York, Attorneys for Plaintiffs and Executive Committee Members.
Donald J. Wolfe, Jr., Esquire, and Kevin R. Shannon, Esquire, of POTTER ANDERSON CORROON, Wilmington, Delaware, Delaware, Attorneys for Defendants J. Rex Fuqua, D. Carl Hamill, Lawrence P. Klamon, Anthony A. Malizia, Carl E. Sanders and John B. Zellars.
R. Franklin Balotti, Esquire, and Anne C. Foster, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware, Attorneys for Defendant Metromedia International Group, Inc.
Thomas Reed Hunt, Jr., Esquire, and David J. Teklits, Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, Attorneys for Defendant J.B. Fuqua.
Edward P. Welch, Esquire, Randolph K. Herndon, Esquire, and Cheryl Siskin, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, Delaware, Attorneys for Clark A. Johnson, Charles R. Scott and Thomas N. Warner.
MEMORANDUM OPINION
Plaintiffs allege that corporate directors, over a period of ten years, engaged in numerous violations of fiduciary duties and other wrongdoing including fraud, usurpation of corporate opportunity, waste of corporate assets, entrenchment, gross mismanagement, disclosure of false and misleading information, self-dealing, formation of an unlawful business combination, denial of a class right to lawful and informed elections, and failure to maximize shareholder value. Finding a few of plaintiffs' claims barred by a previous release and the majority of plaintiffs' allegations insufficient to withstand defendants' motion to dismiss for failure to state a claim, I dismiss all but one of plaintiffs' claims.
Because the defendant directors' decisions to exempt a corporate shareholder from 8 Del. C. § 203 and to repurchase stock resulted in the creation of shares restricted in their ability to be voted against the Board's nominees for directors, and raises a reasonable doubt that the directors' actions will be protected by the presumption of the business judgment rule, I find that plaintiffs have alleged and supported facts sufficient to withstand defendants' motion to dismiss for failure to state a claim and for failure to show why demand should be excused.
I. BACKGROUND
Fuqua Industries, Inc. ("FII") was a Delaware corporation with principal lines of business in sporting goods, lawn and garden equipment, and photofinishing. In 1993, FII changed its name to The Actava Group, Inc. ("Actava") and, in November 1995, merged with three other companies. Its name is now Metromedia International Group, Inc. ("Metromedia").
The Consolidated Second Amended Derivative and Class Action Complaint ("Second Amended Complaint") identifies plaintiffs as current or former shareholders of FII and Actava. Defendants are Triton Group, Inc. ("Triton") and former members of FII's Board of Directors. Defendants J.B. Fuqua, Clark A. Johnson ("Johnson"), Lawrence P. Klamon ("Klamon"), Carl E. Sanders ("Sanders"), Charles R. Scott ("Scott"), and Thomas N. Warner ("Warner") were FII's directors when the initial complaint ("First Complaint") was filed in February 1991. Defendants J. Rex Fuqua, D. Carl Hamill ("Hamill"), Anthony A. Malizia ("Malizia") and John B. Zellers ("Zellers") were directors of FII at various times between 1984 and 1991.
Second Am. Compl. ¶¶ 7, 8.
Triton, an affiliate of Intermark, Inc., merged with Intermark, Inc. in 1990. For consistency, Triton before and after the merger will be referred to as "Triton."
FII is named as a nominal defendant.
A. Contentions of the Parties
Plaintiff Virginia E. Abrams filed the First Complaint on February 22, 1991. After consolidation with two other complaints, plaintiffs filed a Consolidated Amended Derivative and Class Action Complaint ("First Amended Complaint") on August 30, 1991. Just over four years later, plaintiffs filed the Second Amended Complaint on December 28, 1995.
The First Complaint was consolidated with Behrens v. Fuqua Indus., C.A. No. 11988 (filed Mar. 1, 1991) and Freberg v. Fuqua Indus., C.A. No. 11989 (filed Mar. 1, 1991).
At the core of the Second Amended Complaint lies the allegation that the defendants planned and carried out a scheme to entrench themselves in office until J.B. Fuqua's planned retirement in 1989, at which time, management would purchase FII in a leveraged buyout. Plaintiffs further contend that upon the realization that a buyout would be prohibitively expensive, defendants modified the plan to instead transfer control of FII to Triton, a "friendly" stockholder who would allow the defendants to retain their positions. Finally, plaintiffs claim that as part of this plan, defendants wasted corporate assets by entering into a series of transactions intended to prevent the acquisition of FII by other parties. These transactions included the acquisition, retention and sale of Georgia Federal Bank, FSB ("Georgia Federal"), the 1987 Qualex joint venture with Eastman Kodak Company ("Kodak"), J.B. Fuqua's 1989 sale of his six percent of FII stock to Triton, the 1989 agreement ("Section 203 Agreement") between FII and Triton, which exempted the latter from 8 Del. C. § 203 (Delaware's business combination statute) and FII's 1989-1990 stock repurchase program. Plaintiffs also contend that, as a result of the entrenchment plan, defendants released false and misleading disclosures in FII's public filings including FII's 1990 and 1991 shareholder proxies for the election of FII's Board.
The Second Amended Complaint states four causes of action. First, plaintiffs allege that J.B. Fuqua's sale of stock to Triton was a corporate opportunity which defendants usurped for their own benefit. In addition, they claim that the premium received by J.B. Fuqua was improper — representing a "pay off" in exchange for actions by J.B. Fuqua and defendants in support of the entrenchment plan. Count I thus seeks disgorgement of a $15.7 million "premium" obtained by J.B. Fuqua for the sale of his stock.
Second, plaintiffs allege that J.B. Fuqua, Klamon, Malizia, and Sanders again usurped a corporate opportunity and breached their fiduciary duties in connection with the sale of their individual shares of Georgia Federal in 1986. Accordingly, Count II seeks disgorgement of the $15 million profits earned by these defendants.
Third, plaintiffs allege that defendants, by breaching their fiduciary duties, wasting corporate assets and engaging in gross mismanagement and self-dealing, damaged FII and captured personal benefits from the purchase, retention and sale of Georgia Federal, the formation and sale of FII's interest in Qualex, the formation of the Section 203 Agreement, the repurchase of FII's stock, and the disclosure of false and misleading information in public filings.
Count III does not include a specific request for relief.
Finally, plaintiffs assert a class action claim that seeks damages for breach of fiduciary duties. Specifically, plaintiffs claim that defendants deprived the class of information pertaining to 1990 and 1991 Board elections and of the right to vote on a business combination with Triton.
Defendants seek to dismiss plaintiffs' derivative claims for failure to comply with Chancery Court Rules 12(b)(6) and 23.1. In addition, they argue that claims relating to the purchase of Georgia Federal are barred by a settlement, release and final judgment of class action claims filed and approved by this Court prior to FII's acquisition of Georgia Federal in 1986. Finally, they seek to dismiss the class action claim for failure to state a class claim.
Wechsler v. Fuqua Indus., Del. Ch., C.A. No. 8117, Berger, V.C. (May 16, 1986).
B. Legal Standards for a Motion to Dismiss for Failure to Comply with Chancery Court Rules 12(b)(6) and 23.1
Defendants' motion to dismiss for failure to comply with Chancery Court Rule 12(b)(6), which directs plaintiffs to state a claim upon which relief can be granted, requires me to accept all well-pled allegations as true and to construe all inferences in favor of plaintiffs. Defendants' 12(b)(6) motion to dismiss, therefore, will not be granted unless I am reasonably certain that plaintiff is not entitled to relief under any set of facts which could be inferred. Conclusory allegations unsupported by specific factual references, however, will not be accepted as true.
In re Tri-Star Pictures, Inc. Litig., Del. Supr., 634 A.2d 319, 326 (1993).
In re USACafes, L.P. Litig., Del. Ch., 600 A.2d 43, 47 (1991).
In re Tri-Star Pictures, Inc. Litig., 634 A.2d at 326.
Chancery Court Rule 23.1 requires plaintiffs asserting a derivative claim on behalf of a corporation to either make demand upon the corporations' board of directors or state "with particularity" their reasons for failing to make such demand. Defendants do not directly attack the plaintiffs' allegations of demand futility; they instead assert that plaintiffs have targeted the wrong Board. Rather than focus on the Board existing when the First Complaint was filed, defendants argue that plaintiffs should be required to make demand upon the current Board of Directors.
C. The Challenged Transactions
Plaintiffs attack five separate transactions occurring between 1986 and 1994. These transactions include the acquisition, retention and sale of Georgia Federal, the 1987 Qualex joint venture, J.B. Fuqua's 1989 sale of his six percent of FII stock to Triton, the Section 203 Agreement, and FII's 1989-1990 stock repurchase program. Related to these transactions are allegations that defendants released misleading or fraudulent public disclosures, that defendants usurped corporate opportunities, wasted corporate assets, engaged in gross mismanagement and self-dealing and formed an unlawful business combination. Plaintiffs also allege that the overall effect of these acts was the denial of the class's right to lawful and informed elections and the failure to maximize shareholders value. Finally, plaintiffs string these myriad allegations together with the contention that, when viewed as whole, they reveal the existence of a scheme designed to entrench the defendants in office until FII could be sold to management or control of FII could be transferred to Triton. For the purposes of the motion to dismiss, I accept the following nonconclusory factual allegations as true.
At oral argument, counsel for some of the individual defendants characterized these myriad allegations (fifty pages and 127 paragraphs in the Second Amended Complaint) as a "dog's breakfast," an effort by plaintiffs to "offer up a bowl of mixed leftovers to a mutt" as an appetizing meal. A colorful metaphor, with perhaps an apt reference to my role in this matter.
1. The Acquisition, Retention and Sale of Georgia Federal
In February 1986, FII acquired Georgia Federal as a wholly-owned subsidiary for $225 million. During the sixteen months immediately preceding the acquisition, six of FII's nine directors purchased approximately ten percent of Georgia Federal's outstanding shares at prices ranging from $8.00 to $10.00 per share. When FII purchased all of Georgia Federal's outstanding shares at $27.75 per share, some of the defendants reaped personal profits ranging from $34,300 to just over $14 million.
Second Am. Compl. ¶ 17.
Id. ¶ 23.
Id.
As a result of the acquisition, FII became subject to Federal Savings and Loan Insurance Corporation ("FSLIC") and Federal Home Loan Bank Board ("FHLBB") regulations which prevented anyone from acquiring more than ten percent of FII's stock without obtaining prior FHLBB approval. In 1987, FII's Board announced it was seeking to sell Georgia Federal. Press releases stated an asking price of $350 million. FII discussed the possible sale with several potential buyers between 1987 and February 1989, none of whom were willing to pay more than $250 million. Finally, on February 1, 1989, FII entered an agreement to sell Georgia Federal for $234,500,000.
Id. ¶ 92.
Id. ¶ 94.
Id. ¶ 93.
Id. ¶ 41.
2. The Kodak — FII Joint Venture
On December 7, 1987, FII and Kodak entered into a joint venture to combine their photofinishing operations into one organization: Qualex, Inc. ("Qualex"). In 1994, FII (then renamed Actava) sold its fifty-percent interest in Qualex to Kodak and reported a loss of $37.9 million on the sale.
Id. ¶ 27.
3. J.B. Fuqua's Sale of FII Stock
In August and October, 1988, Triton purchased almost three percent of FII's shares in the market at prices ranging from $27.00 to $29.00 per share. In response to FII's October 7 press release, which revealed Triton's purchase and stated that Triton, intending further purchases, had had preliminary discussions with J.B. Fuqua about the possible purchase of his shares, FII's stock price rose to $32 per share. On October 27, Triton revealed that the day before, J.B. Fuqua had granted to Triton an option to purchase J.B. Fuqua's six percent of FII's shares for $38 per share, with $2 per share of this price representing the cost of the option itself. Triton exercised this option on January 11, 1989, purchasing J.B. Fuqua's entire six percent. Combined with the three percent Triton previously purchased, Triton's ownership of FII at this time amounted to just under ten percent, the maximum allowed without FHLBB approval.
Id. ¶ 31.
Id. ¶ 32.
Id. ¶ 35.
Id. ¶ 34.
Id. ¶ 39.
4. The Section 203 Agreement
Section 203 of Delaware's General Corporation Law is commonly referred to as our business combination statute. It provides that a corporation shall not engage in a business combination with an interested shareholder within three years of the date on which that shareholder became an interested shareholder unless 1) prior to that date the corporation's board of directors had approved the business combination or had approved the shareholder becoming an interested shareholder, 2) at the time the shareholder became an interested shareholder it obtained at least eighty-five percent of the voting stock of the corporation, or 3) the business combination is approved by the board of directors and two-thirds of the disinterested shareholders. At FII's May 17, 1989, Board meeting, J.B. Fuqua, Klamon and Sanders approved a resolution (the "Board Resolution"), pursuant to section 203(a)(1), to allow Triton or its affiliates to purchase over fifteen percent of FII's stock and thereby become an interested shareholder. The Board Resolution conditioned the final agreement with Triton (the "Section 203 Agreement") on three terms. First, Triton and its affiliates would be prevented from entering into a business combination with FII for a period of three years from the date on which Triton became an interested shareholder unless it first obtained the approval of a majority of FII's disinterested directors. The Board Resolution defined "disinterested director" as "[o]ne who was not an officer, director or control person of Triton or any `affiliate' of Triton." Second, during this three-year period, FII's Board would consist of a minimum of seven directors, three of whom would be disinterested. Third, Triton and its affiliates would vote their FII shares in favor of the Board's nominees for FII's directors. On May 22, 1989, Triton and FII entered into the Section 203 Agreement which also provided that FII would not be considered an affiliate of Triton. This provision ensured that FII's officers and directors would be classified as "disinterested directors" as long as they were not officers or directors of Triton or any of its affiliates other than FII. By July 1989, Triton owned fifteen percent of FII's stock. By September, it had acquired just over twenty percent.
In general terms, an "interested shareholder" is one who owns 15% or more of the corporation's outstanding stock. See 8 Del. C. § 203(c)(5).
Defendant Scott also attended the meeting but is not alleged to have voted in favor of the resolution. Second Am. Compl. ¶ 45.
"Affiliate" was defined by reference to section 203 which describes an affiliate as "a person that directly, or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, another person." "Control," in turn, is defined as ownership "of 20% or more of a corporation's outstanding stock." Control upon such ownership will be presumed "in the absence of proof by a preponderance of the evidence to the contrary."
Second Am. Compl. ¶ 51.
Id. ¶ 60.
5. The Stock Repurchase Program
Between November 1989 and October 1990, FII's Board authorized the repurchase of six million shares in three two-million share increments. FII stopped repurchases in late 1990 when it had acquired 4.9 million shares at a total cost of approximately $110 million. As a result of the repurchases, Triton's ownership of FII increased from just over twenty percent to just over twenty-five percent, the minimum amount necessary for Triton to avoid classification as a passive investor and to avoid the need to comply with the associated reporting requirements of the Investment Company Act of 1940.
Id. ¶ 62.
Id. ¶ 63.
Plaintiffs' Memorandum in Opposition to Defendants' Motion to Dismiss at 30 [hereinafter Pls.' Memo.].
II. GEORGIA FEDERAL RELEASE
Defendants also argue that plaintiffs' Georgia Federal claims are barred by res judicata and, alternatively, fail to state a claim for fraud. It is not necessary to address the merits of these claims as the discussion below is dispositive of plaintiffs' claims addressed by these arguments.
The Board of Directors is not proposing the merger because of its anti-takeover effect and the proposed merger is not part of a plan by the Board of Directors to take a series of anti-takeover actions. The Board of Directors is proposing the Merger because it believes the acquisition of Georgia Federal will be beneficial to Fuqua and its stockholders. Arguing that FII "had an official corporate policy against adopting mechanisms or taking actions for the purpose of preventing a takeover of FII," plaintiffs assert that the proxy, in order to not be misleading, had to reveal 1) that Georgia Federal was purchased for its anti-takeover effects, 2) that the purchase of Georgia Federal was part of a planned series of anti-takeover actions, and 3) the nature and existence of the entrenchment plan and the way in which the purchase of Georgia Federal would further that plan. Finally, plaintiffs allege that defendants J.B. Fuqua, Klamon, Malizia and Sanders usurped a corporate opportunity of FII and reaped personal profits by purchasing shares of Georgia Federal during the sixteen months prior to its acquisition by FII.
Id. ¶ 20.
Id. ¶ 15.
Defendants argue that plaintiffs' claims relating to the purchase of Georgia Federal are barred by a settlement, release and final judgment of a previous class action approved by this Court in 1986. Plaintiffs contend that the release is unenforceable, having been obtained through solicitation based on the fraudulent proxy statement.
Wechsler, C.A. No. 8117.
I do not find that the proxy statement was fraudulent. Contrary to plaintiffs' assertions, defendants were not required to reveal their allegedly improper motives. Moreover, plaintiffs' counsel reviewed and commented upon the proxy statement which sought shareholder approval of the Georgia Federal acquisition "to assure that the pertinent facts relating to the proposed transaction and all of the personal interests of the Individual Defendants in the transaction were fully disclosed to stockholders." Counsel concluded "that the Proxy Statement insured full and complete disclosure of all material facts." Finding that the release is valid, I must determine whether its scope bars plaintiffs' claims of usurpation of corporate opportunity and entrenchment. Defendants, relying on Nottingham Partners v. Dana and In re Union Square Assocs. Sec. Litig., argue that the release bars all claims arising from the same set of operative facts or the same factual predicate. The release discharges the Wechsler defendants, including Fuqua, Klamon, Malizia and Sanders from
Stroud v. Grace, Del. Supr., 606 A.2d 75, 84 (1992).
Appendix to Opening Brief in Support of the Defendants' Motion to Dismiss Ex. H at 9 [hereinafter Defs.' Open. Br. App.] (Plaintiffs' Memorandum in Support of Approval of Settlement and Application for Attorneys' Fees and Expenses).
Id.
Del. Supr., 564 A.2d 1089, 1105-07 (1989).
Del. Ch., C.A. No. 11028, at 15-16, Chandler, V.C. (Nov. 29, 1993).
any and all liability under or based upon each and every claim, cause, matter and issue which is fairly embraced within the scope of the pleadings or which is, or could have been, set forth therein or which may arise out of, under, or in connection with the acquisition of Georgia Federal by [FII] or any matter or transaction referred to in the pleadings.
Defs.' Open Br. App. Ex. F ¶ 5 (Order and Final Judgment).
Defendants argue that because the complaint in Weschler alleged that J.B. Fuqua "unfairly profited" as a result of his purchase of Georgia Federal stock, plaintiffs' corporate opportunity claims, based on allegedly wrongful purchases of Georgia Federal stock, arose out of or in connection with the acquisition of Georgia Federal and "could have been asserted" at the time of the Weschler settlement. Defendants contend that plaintiffs' entrenchment and anti-takeover claims, which are based on FHLBB regulations in existence at the time FII acquired Georgia Federal, are likewise barred. Finally, defendants argue that plaintiffs' claims based on the retention of Georgia Federal are barred because "retention of an asset surely is an issue which `hereafter arise[s] out of the acquisition' of that asset."
Reply Brief of Certain Defendants in Support of Defendants' Motion to Dismiss Ex. K ¶ 14 [hereinafter Certain Defs.' Reply Br.] (Am. Compl.).
Opening Brief in Support of the Defendants' Motion to Dismiss at 19 [hereinafter Defs.' Open. Br.] (citing Defs.' Open. Br. App. Ex. G at 6 (Stipulation of Compromise and Settlement)).
Also relying on Nottingham Partners, plaintiffs argue that their claims are not barred by the Wechsler claims because the two claims do not share a common gravamen. They explain that the Wechsler action asserted a claim of waste based on FII's overpayment for Georgia Federal while the current action asserts that defendants usurped a corporate opportunity by purchasing Georgia Federal shares in advance of FII's purchase of Georgia Federal. Furthermore, plaintiffs contend that even if the release were found to cover claims of corporate opportunity, the release cannot cover claims occurring after the settlement date. Accordingly, they assert that the defendants' refusal to sell Georgia Federal, despite recognizing that its continued ownership was depressing FII's stock price, was wrongfully motivated by the defendants' desire to reduce the cost of transferring control of FII to either management or Triton and, thus, not covered by the terms of the release.
See 564 A.2d at 1106.
Plaintiffs' present corporate opportunity claims are based upon the defendants' receipt of individual profits resulting from the sale of their personal stock. Thus, the basis of the complaint is that the defendants unfairly profited at the expense of FII. Messrs. Klamon, Sanders and Malizia were defendants in the Weschler action and the events which formed the basis of the unfair profit allegation against J.B. Fuqua in that action are the same events on which plaintiffs now attempt to construct claims of usurpation of corporate opportunity against the other defendants. Accordingly, I find that the terms of the Weschler release bar plaintiffs' claims of usurpation of corporate opportunity against defendants J.B. Fuqua, Klamon, Malizia and Sanders. Plaintiffs' claim that the acquisition of Georgia Federal was motivated by the defendants' desire to entrench themselves in office and to acquire the anti-takeover effects of the FHLBB regulations is also barred by the Weschler release because the FHLBB regulations were in existence when Georgia Federal was acquired and the effects of those existing regulations arose out of or in connection with the acquisition.
The Weschler complaint charged that defendants were "liable to [FII] for all loss and damage that it has suffered or will suffer from the wrongs alleged herein." Certain Defs.' Reply Br. Ex. K ¶ 14 (Am. Compl.).
Plaintiffs' remaining Georgia Federal claim asserts that defendants wrongfully refused to sell Georgia Federal, despite awareness that continued retention was depressing FII's stock price and harming FII's shareholders. This wrongful refusal to sell, according to plaintiffs, constituted a waste of FII's assets and resulted from defendants' desire to transfer control of FII (at the lowest possible price) to management or Triton, and to provide J.B. Fuqua with an inflated premium for the sale of his stock. While this is also partly an entrenchment and anti-takeover claim, it is not based on the effects of the FHLBB regulations. As the alternate bases (allegations of waste and/or entrenchment) for this claim of wrongful refusal to sell are unrelated to the acquisition of Georgia Federal or the existence of the FHLBB regulations, it is not barred by the release.
Second Am. Compl. ¶ 98.
This finding does not preclude dismissal on other grounds.
III. MOTION TO DISMISS
A. Standard of ReviewRelying on Unocal Corp. v. Mesa Petroleum Co., plaintiffs assert that the defendants' acts, which had the effect of "insuring effective control in the hands of Triton and, thereby, foreclosing any real opportunity for the FII shareholders to receive an acquisition proposal" must be examined with enhanced scrutiny which requires defendants to demonstrate that they had reasonable grounds for believing in the existence of a threat to corporate policy and effectiveness and that their actions in response were reasonable in relation to the degree of the threat. Plaintiffs also assert that, according to Weinberger v. UOP, Inc., the existence of the defendant directors' financial interests in Triton requires these defendants to demonstrate that these self-dealing transactions were entirely fair to FII and its shareholders.
Del. Supr., 493 A.2d 946 (1985).
Pls.' Memo. at 18.
See Unitrin, Inc. v. American Gen. Corp., Del. Supr., 651 A.2d 1361, 1373 (1995).
Del. Ch., 409 A.2d 1262 (1979).
Defendants argue that enhanced scrutiny is not required because plaintiffs have failed to allege that defendants acted in response to a "perceived threat to corporate policy and effectiveness which touches upon issues of control." Defendants interpret the allegations of the complaint as suggesting that they facilitated, rather than defended against, a change of control. Furthermore, defendants assert that plaintiffs' "conclusory allegation" of self-dealing fails to identify specific transactions and, therefore, does not require the defendants to demonstrate entire fairness.
Certain Defs.' Reply Br. at 14 (quoting Unitrin, 651 A.2d at 1372 n. 9).
Plaintiffs make no allegations that the Board was faced with a threat to corporate control. Plaintiffs' allegations are not presented as preemptive acts designed to defend against a threat to control but as deliberate acts designed to entrench the directors and assist them in pursuit of either a management buy-out or transfer of control to Triton. As such, the allegations do not trigger enhanced scrutiny and the burden of rebutting the presumption of the business judgment rule remains on the plaintiffs.
B. The Georgia Federal Claim of Waste
Plaintiffs claim that FII's Board deliberately waited to sell Georgia Federal until Triton purchased J.B. Fuqua's stock and that the Board's refusal to sell Georgia Federal before that time, despite the Board's awareness that continued ownership of Georgia Federal was depressing FII's stock price, constituted a waste of FII's assets. A claim of waste is typically founded upon a board's decision to acquire, rather than dispose of, a corporate asset. Thus, the determination of whether a board has engaged in acts of corporate waste is frequently expressed as based upon "whether what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid. If it can be said that ordinary businessmen might differ on the sufficiency of the terms, then the court must validate the transaction." In this case it may be said that plaintiffs attempt to allege two separate claims of waste: one based on the harm that FII suffered as a result of the Board's decision to sell Georgia Federal for $235 million, and one based on the Board's delay in selling Georgia Federal. Neither attempt is successful.
Second Am. Compl. ¶ 91.
Saxe v. Brady, Del. Ch., 184 A.2d 602, 610 (1962). See also Grobow v. Perot, Del. Supr., 539 A.2d 180, 189 (1988); Chrysogelos v. London, Del. Ch., C.A. No. 11910, at 10, Jacobs, V.C. (March 25, 1992).
Plaintiffs' allegations reveal that FII announced its intentions to sell Georgia Federal at an asking price of $350 million. According to the complaint, the price was based upon a multiple of book value and the addition of $110 million in good will. The complaint also states that "FII was approached by a number of qualified purchasers, who were willing to purchase Georgia Federal for its fair market value," that the fair market value was "approximately $230,000,000 to $250,000,000," and that FII ultimately agreed to sell Georgia Federal for just under $235 million. Absent facts which would support a finding that the decision to include $110 million in good will in the initial asking price or the decision to agree to sell Georgia Federal for $235 million, a price which plaintiffs concede is within the fair market value, could not have been the result of sound business judgment, plaintiffs' allegations fail to establish a claim of waste. I dismiss all of plaintiffs' claims of waste based on the sale or the timing of the sale of Georgia Federal.
Second Am. Compl. ¶ 94.
Id. ¶ 41.
C. The Validity of the Section 203 Agreement
Plaintiffs allege that FII entered into the Section 203 Agreement with Triton in violation of the Board Resolution approved on May 17, 1989, by defendants J.B. Fuqua, Klamon and Sanders. Specifically, plaintiffs allege that the Board Resolution, but not the Agreement, required FII's Board to consist of at least three disinterested directors and required approval of the majority of disinterested directors before Triton could enter into a business combination with FII. Furthermore, the Agreement, unlike the Board Resolution, exempts FII from the definition of disinterested director.
Plaintiffs contend that the Agreement is null and void because defendants failed to either amend the Section 203 Agreement to conform to the Board Resolution or to ratify the Section 203 Agreement, even though it did not conform to the Board Resolution. The Agreement is also null and void, according to plaintiffs, because each of the three directors approving the Board Resolution owned stock of Triton or its affiliated companies ranging in amounts from approximately $65,000 to over $3.6 million, Klamon was a director of Pier 1, an affiliate of Triton, and none of these financial interests were "discussed or properly addressed in connection with the approval of the" Board Resolution. Thus, plaintiffs conclude that the directors are not entitled to the protections of 8 Del. C. § 144 and that the directors must demonstrate that the transaction was entirely fair.
Id. ¶ 57.
Id. ¶ 48.
The business judgment rule protects the Board's decision not to amend or formally ratify the Section 203 Agreement. The Board Resolution authorized the officers of FII to enter into an agreement that would exempt Triton from 8 Del. C. § 203. The terms of the Agreement were subject to certain conditions. Whether the Section 203 Agreement complied with the Board's authorization and whether the Section 203 Agreement was in the best interests of FII was a decision for the Board. Under the terms of the Agreement, any business combination between Triton and FII would require the approval of the majority of FII'sdisinterested directors. Plaintiffs' allegations that the directors approving the Board Resolution were stockholders or directors of Triton and its affiliates fails to rebut the presumptions of the business judgment rule in connection with the Section 203 Agreement. Finding no reason to presume that the Section 203 Agreement was not the result of a valid exercise of business judgment, I dismiss plaintiffs' claim that the Agreement is null and void.
D. The J.B. Fuqua Stock Sale
Relying on Frantz Mfg. Co. v. EAC Industries and Citron v. Steego Corp., plaintiffs assert that directors may sell their shares in a corporation if they act in good faith and do not "dominate, interfere with, or mislead" other shareholders in the exercise of their rights. Plaintiffs allege that J.B. Fuqua obtained an inflated premium on the sale of his six percent of FII's stock to Triton by agreeing to promote Triton's interest within the corporation. Such an allegation, if true, would be a breach of fiduciary duty. Plaintiffs, however, fail to support this allegation with sufficient facts to withstand defendants' motion to dismiss for failure to state a claim.
Del. Supr., 501 A.2d 401, 408 (1985).
Del. Ch., C.A. No. 10171, at 18, Allen, C. (Sept. 9, 1988).
Pls.' Memo. at 19.
Endervelt v. Nostalgia Network, Inc., Del. Ch., C.A. No. 11415, at 7-8, Chandler, V.C. (July 23, 1991).
According to plaintiffs, Triton's agreement with J.B. Fuqua was not an option agreement but a firm agreement to purchase J.B. Fuqua's shares in January at a fixed price of $38 per share. The complaint alleges that news of the agreement was deliberately withheld from the public until after FII's October 7 press release which caused FII's stock price to jump from $28 to $32 per share in response to news that Triton and J.B. Fuqua had discussed purchase of his shares. Starting with the $28 per share price of FII's stock prior to October 7 and ignoring the $2 per share "purported option price," plaintiffs allege that J.B. Fuqua received an improper thirty-six percent premium over market price for his shares — a premium which represented payment for an agreement by J.B. Fuqua and other Board members to "use and abuse their power and control over FII in their official capacity to manipulate FII for their own personal benefit, contrary to the interest of FII's other stockholders." The acts that J.B. Fuqua and other defendants are alleged to have agreed to undertake in exchange for the inflated premium include:
The record does not reveal FII's stock price on the date the option agreement was announced. Using the stated October 7 price of $32 per share, the premium, including the $2 per share option price, was 19%. Examined as an option agreement, with $2 allocated to the price of the option, the agreement provided the option to purchase 6% of FII, in the future, at a premium of 13% over the current share price.
Second Am. Compl. ¶ 35.
Id. ¶ 36.
• a series of entrenchment and anti-takeover devices designed to ensure that Triton could purchase control of FII without paying a control premium to FII's shareholders
• actions to depress FII's stock price to ensure that the defendants and Triton could gain control of FII at the lowest possible price
• fraudulent public disclosures which concealed the entrenchment plan and prevented election of disinterested directors
• an agreement to sell Georgia Federal only after J.B. Fuqua sold his stock
• J.B. Fuqua's agreement to delay execution and announcement of the option agreement until after Triton had purchased three percent of FII's shares
• an agreement to place Triton's nominees on FII's Board of Directors and elect Scott as Chairman of the Board
• an agreement to enter into, but delay the announcement of, the Section 203 Agreement, and
• FII's stock repurchase program
The impact of these actions, allegedly performed in exchange for the premium received by J.B. Fuqua, was to enrich Triton and its shareholders including J.B. Fuqua, Johnson, Klamon, Sanders, Scott, and Warner. Thus, according to plaintiffs, "[J.B.] Fuqua sold his 6% shares [sic] of FII to Triton not in a personal and private capacity but in his official capacity as the Chairman of the Board of FII, the Chief Executive Officer of FII, and the dominating and controlling director of FII." Plaintiffs fail to allege facts supporting the alleged connection between the sale of J.B. Fuqua's stock and later actions taken by FII's directors. There are no facts indicating that the premium was shared with the other directors or that J.B. Fuqua was in a position to dominate or control the other directors. In sum, plaintiffs fail to explain why the other defendants would be willing to breach their fiduciary duties and engage in allegedly improper acts in order for J.B. Fuqua to obtain a premium on the sale of his shares. Accordingly, I dismiss Count I which seeks disgorgement of the "premium" obtained by J.B. Fuqua in connection with the sale of his stock.
Id. ¶ 103.
Id. ¶ 102.
Plaintiffs' separate claim that the directors' financial interests in Triton or its affiliates motivated the performance of the acts listed above is addressed separately throughout this opinion. See, e.g., text of this Opinion at 23-24.
E. The Stock Repurchase Program
Plaintiffs allege that the defendants breached their fiduciary duties by approving the repurchase program "to further their self-interests and the interests of [Triton]." Plaintiffs, however, do not identify which, if any, directors had financial interests in Triton or its affiliates at the time of approval. Thus, the claim of self-interest must be based upon plaintiffs' assertion that "[o]nce [Triton] acquired 20% or more of FII's stock, by definition, no member of FII's Board of Directors would be a Disinterested Director because FII itself would be an affiliate of [Triton] and the requirements of the Board Authorization for an agreement with [Triton] could no longer be satisfied." This allegation is internally inconsistent. On one hand, plaintiffs rely on the existence of the Section 203 Agreement, which contains the definition of "disinterested director" and yet, on the other hand, plaintiffs assume that the additional provision of the Section 203 Agreement, which exempts FII from the definition of disinterested director, does not exist. Thus, even if the failure of FII's directors to be "disinterested directors" under the terms of the Section 203 Agreement were relevant for the purpose of determining whether they were interested in approval of the repurchase program, a question which I do not need to resolve, the allegations of plaintiffs' complaint cannot be read to assert a claim of self-interest.
Pls.' Memo. at 30.
Second Am. Compl. ¶ 54. The reasoning is apparently based on the following. Once Triton acquired over 20% of FII, it was presumed to "control" FII. 8 Del. C., § 203(c)(4). FII, under the "control" of Triton, was considered to be an affiliate of Triton. Id. Under the Section 203 Agreement, FII's directors could not be "disinterested directors" with respect to their ability to approve a business combination with Triton, if they were also a director of Triton or any of its affiliates. The Section 203 Agreement also provided, however, that FII would not be considered an affiliate of Triton.
Plaintiffs also contend that the repurchase program resulted in an unlawful business combination under 8 Del. C. § 203(c)(3)(iv). Second Am. Compl. ¶ 61. However, the Section 203 Agreement, the validity of which plaintiffs have failed to successfully challenge, allowed Triton to become an "interested shareholder." The repurchase program is, therefore, not an unlawful business combination.
F. The Disclosure Claims
Plaintiffs allege that FII's Board caused the release of numerous false and misleading disclosures in the 1990 and 1991 election proxies and various public filings including FII's 8K filed on February, 16, 1991 and FII's 10K filed on April 1, 1991. None of plaintiffs' allegations are sufficient to support a finding that the defendants breached their duty of disclosure. I dismiss plaintiffs' allegations, such as those found in paragraphs 68, 75, and 79 of the Second Amended Complaint, which are dependent upon the invalidity of the Section 203 Agreement or the failure of the Agreement to mirror the terms of the Board Resolution because, as discussed above, I find no indication that the Section 203 Agreement was not the result of a valid exercise of business judgment. I also dismiss plaintiffs' contention, found throughout the Second Amended Complaint, that defendants breached their fiduciary duty by failing to disclose the existence of the entrenchment plan and the ways in which the various acts of the defendants supported that plan. Delaware law does not require directors to reveal their allegedly improper schemes and plans.
Second Am. Compl. ¶¶ 68, 75, 79, 84, 86-87.
Stroud, 606 A.2d at 84.
IV. ENTRENCHMENT CLAIMS
A successful claim of entrenchment requires plaintiffs to prove that the defendant directors engaged in action which had the effect of protecting their tenure and that the "action was motivated primarily or solely for the purpose of achieving that effect."A. The Remaining Georgia Federal Claim
In addition to the entrenchment claim based upon the effects of the FHLBB regulations, plaintiffs assert that the defendants' wrongful refusal to sell Georgia Federal was motivated by defendants' desire to transfer control of FII (at the lowest possible price) to FII's management or to Triton. As discussed, the former claim is barred by the Weschler release. The latter fails to allege how, aside from the effects of the FHLBB regulations, the retention of Georgia Federal served to protect the tenure of the defendant directors. Accordingly, it fails to allege a claim of entrenchment and must be dismissed.
Second Am. Compl. ¶ 98.
See text of this Opinion at 12-18.
B. Qualex Joint Venture
Plaintiffs allege that the formation of the Qualex joint venture was part of an entrenchment plan and was designed to "lock up the assets, cash flow and control of FII's Colorcraft subsidiary, one of the most valuable and profitable of FII's business segments" until the planned retirement of J.B. Fuqua. According to plaintiffs, the terms of the joint venture provided that "after the Entrenchment Plan was implemented, the cash flow generated by the Colorcraft assets would be reinstated by FII." Furthermore, the joint venture allegedly allowed "an onerous change of control of Colorcraft in favor of Kodak if a change of control of FII occurred during the first two years of the joint venture agreement" and "explicitly exempted the defendants' contemplated management buy out." Entirely lacking from plaintiffs' complaint are any facts to support these conclusory allegations of "onerous" terms and entrenchment effects. Conclusory allegations unsupported by specific factual references may not be accepted as true even under the lenient pleading standards of Rule 12(b)(6). I dismiss plaintiffs' claims of entrenchment based on the Qualex joint venture.
Second Am. Compl. ¶ 24.
Id. ¶ 25.
Id. ¶¶ 26, 27.
In re Tri-Star Pictures, Inc. Litig., 634 A.2d at 326.
C. The Section 203 Agreement
Plaintiffs' allegations with respect to the Section 203 Agreement are sufficient to state a claim. Under either the Board Resolution or the Section 203 Agreement, Triton and its affiliates were required to vote their shares in favor of the FII board's nominees for directors. Properly supported allegations that a board's acts have resulted in the creation of shares that may not be used to vote against the board's nominees raise a reasonable doubt that the actions were not taken solely or primarily to protect the board's tenure. Thus, a reasonable doubt exists that the board's decision to exempt Triton from 8 Del. C. § 203 will be protected by the business judgment rule and I deny defendants' motion to dismiss this claim.
See Abajian v. Kennedy, Del. Ch., C.A. No. 11425, at 14, Allen, C. (Jan. 17, 1992) ("Even if one assumes that there could be valid corporate purposes served by consensually restricting the ability of a substantial shareholder to oppose management or communicate with other shareholders, it seems nevertheless to be the case that such restrictions do raise the prospect of impermissible motivation as one plain possibility.").
D. The Repurchase Program
Plaintiffs allege that FII repurchased only 4.9 million shares, as opposed to the authorized six million shares, because the repurchase of 4.9 million shares was all that was needed to increase Triton's ownership of FII, which by this time had already increased to approximately twenty percent, to just over twenty-five percent — the minimum amount necessary for Triton to avoid the need to comply with the reporting requirements of the Investment Company Act of 1940. The reason why FII sought to assist Triton, according to plaintiffs, was to further the entrenchment plan, hinder the ability of third parties to acquire a "cash-rich" FII, and transfer control of FII to Triton. Because the terms of the Section 203 Agreement provide that all of Triton's shares of FII shall be voted in favor of the FII Board's nominees for directors, the repurchase program had the effect of further increasing the number of shares that were limited in their ability to remove the current directors. Thus, the effect of the repurchase program, like the effect of the Section 203 Agreement, raises a reasonable doubt that the Board's actions were not motivated by defendants' desire to entrench themselves in office. Accordingly, I deny defendants' motion to dismiss this claim.
V. DEMAND
Only one of plaintiffs' claims survives defendants' Chancery Court Rule 12(b)(6) motion to dismiss — the claim ofentrenchment based on the Board's decisions to enter into the Section 203 Agreement and to repurchase stock. Defendants argue that this claim still must be dismissed because plaintiffs failed to comply with Chancery Court Rule 23.1.
Plaintiffs did not make demand on FII's Board. Defendants seek to dismiss plaintiffs' derivative claims because the allegations fail to establish that demand on the current board is futile and, thus, should be excused. Citing to Rales v. Blasband, they assert that when the majority of directors approving the challenged transactions have been replaced, the focus of the court should be on "whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations." Furthermore, relying on this Court's holding in Harris v. Carter, they argue that in a case such as this, where an amended complaint raises claims that are not already "validly in litigation," the board that should address demand is the board in existence at the time of filing of the amended complaint. In sum, defendants argue that because 1) nine of the Board's ten current directors were not on the Board when the First Complaint was filed, 2) over four years elapsed between the filing of the First Complaint and the Second Amended Complaint, and 3) the Second Amended Complaint raises allegations not contained in the First Complaint, the Court must require plaintiffs to make demand upon the current disinterested Board in order to allow it "the opportunity to exercise its judgment and manage the corporation's affairs."
Del. Supr., 634 A.2d 927, 934 (1993).
Del. Ch., 582 A.2d 222, 230 (1990).
Defs.' Open. Br. at 28.
Plaintiffs assert that under well-established Delaware law, a court must consider whether the board in existence at the time the first complaint was filed could have impartially considered demand. Furthermore, relying on Rales, they argue that this rule applies even when the board that would be addressing demand is not the board that approved the challenged transactions. Thus, plaintiffs' Second Amended Complaint does not allege that demand upon the current Board would be futile. Instead, it repeats the allegations, stated initially in the First Complaint, that demand upon the Board existing in February 1991 would have been futile because a majority of the directors at that time were not disinterested and independent.
Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984); Katz v. Halperin, Del. Ch., C.A. No. 13811, Steele, V.C. (Feb. 5, 1996); Steiner v. Meyerson, Del. Ch., C.A. No. 13139, Allen, C. (July 19, 1995).
See 634 A.2d at 933-34.
Second Am. Compl. ¶ 107.
A. Chancery Court Rule 23.1
Derivative suits allege injury to the corporation. Because the injury is to the corporation and not directly to the plaintiff (either individually or as a member of a class), and because the responsibility for management of the corporation's business and affairs is vested with the board of directors, it is the right of the board, at least initially, to seek redress for injuries to the corporation. Thus, before filing a derivative suit on behalf of a corporation, plaintiffs must generally first give the board notice of the alleged wrong and offer to it the opportunity to assess the merits of the allegations and to determine the appropriate response. The board's response, like other decisions affecting the management and affairs of the corporation, is protected by the business judgment rule, a rule which recognizes that the board, not the Court, is in the best position to manage the corporation's affairs. Business decisions by an informed, disinterested, independent board will be respected by this Court.
Del. C. § 141(a).
Allegations that the board is unable to act in an informed, disinterested and independent fashion challenge the assumption that the board is in the best position to craft a response reflective of the best interests of the corporation. Accordingly, a showing that the transaction which caused the alleged injury was not the product of valid business judgment, or a showing that a majority of the board is not able to disinterestedly and independently consider the demand, will excuse the plaintiff from making demand.
This requirement that plaintiffs either make demand or show that demand should be excused is codified in Chancery Court Rule 23.1 which, unlike its federal counterpart, is not merely a procedural requirement. The corresponding substantive test which this Court must apply to the question of demand excusal is "whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Because this test requires an application of the business judgment rule to the conduct of the board, the test should not be applied when the transaction at issue was not the result of a conscious business decision made by the board that would be considering demand ( e.g., the board in existence when the complaint is filed). Such a situation arises when the challenged transaction is either 1) not the result of a business decision ( e.g., where the board did not act) or 2) the result of a business decision but a majority of those making the decision have since been replaced or the decision was made by the board of a different corporation.
Aronson v. Lewis, Del. Supr., 473 A.2d 805, 814 (1984). See also Grobow, 539 A.2d at 183, 186; Pogostin, 480 A.2d at 624-25.
Rales, 634 A.2d at 934.
The appropriate test in any of these cases, therefore, is not an examination of whether the board has already demonstrated an inability to exercise business judgment with respect to the challenged transaction or an examination of whether the board approving the transaction is unable to exercise disinterested and independent judgment with respect to demand because, in any of these cases, there will have been no exercise of business judgment with respect to the transaction or the majority of the board approving the transaction will not be represented on the current board that would be considering demand. The appropriate test, therefore, is whether the board in existence at the time the complaint is filed is able to properly carry out its fiduciary duty to evaluate demand in a disinterested and independent fashion. In such unique circumstances, only this test recognizes that it is the fundamental right of the board to manage the corporation's affairs and that this right should not be trampled unless plaintiffs are able to show that the board has already failed in this regard or is otherwise so tainted as to lead to the conclusion that it is unable to act in the best interests of the corporation.
When, as here, the majority of the board is replaced between the filing of a first complaint and the filing of an amended complaint, it is necessary to determine upon which board the plaintiff should make demand or with respect to which board the plaintiff should be required to show that demand is futile and, thus, should be excused. As when the majority of the board is replaced between the challenged transaction and the filings of the first complaint, the appropriate demand board when the majority of the board has been replaced between the filings of the first and amended complaints is the board in existence when the first complaint is filed. The filing of an amended complaint only affects this initial finding to the extent that the amended complaint raises claims not already "validly in litigation." For only with respect to those claims will adherence to the policy of making demand upon the first board deprive a board of its right to control the business and affairs of the corporation. Thus, claims alleged in an amended complaint, which were not already validly in litigation, should be presented to the board in existence at the time of filing of the amended complaint or the plaintiff should state with particularity why demand upon that board would be futile and, thus, should be excused.
Id. at 935; Harris, 582 A.2d at 231.
Harris, 582 A.2d at 230.
Defendants contend that because the current board has never had the opportunity to assess demand for any of the claims asserted in the Second Amended Complaint, they have been denied the right to control the affairs of the corporation. Thus, they argue that this Court should follow the reasoning of Brody v. Chemical Bank, which held that a court should assess whether demand is excused by reference to the board in existence at the date of filing of the amended complaint. Defendants, however, fail to raise any arguments that this Court has not already considered and rejected. In Harris, Chancellor Allen considered the reasoning in Brody and acknowledged the importance of allowing a corporation "the opportunity to take over a suit which was brought on its behalf." He determined, however, that "[t]hat important interest may be otherwise served."
When a board is comprised of new directors who are under no personal conflict with respect to prosecution of a pending derivative claim, the board may cause the corporation to act in a number of ways with respect to that litigation. It may move the court to take control of the litigation by being re-aligned as a party plaintiff . . ., move to dismiss the case as not, in the board's business judgment, in the corporation's best interest . . . [or] allow the representative plaintiff and his counsel to carry the litigation forward. These options fully protect the legitimate right of the board under Section 141(a) to manage the corporation's business and affairs.
Thus, when during the pendency of a derivative litigation there occurs a change in the composition of a board that had been disabled by conflict, and the board as newly constituted is capable of validly exercising judgment concerning that corporate claim, it has sufficient avenues open to it to meet its Section 141(a) responsibilities. There are good reasons not to go further and require that a derivative plaintiff interrupt litigation, when amending his pleading or otherwise, to make a demand upon such a newly constituted board.
517 F.2d 932 (2d. Cir. 1975).
Harris, 582 A.2d at 230 (citing Brody, 517 F.2d at 934).
Id. at 230.
. . . .
When claims have been properly laid before the court and are in litigation, neither Rule 23.1 nor the policy it implements requires that a court decline to permit further litigation of those claims upon the replacement of the interested board with a disinterested one. In that circumstance a new board should be required to take one of the steps outlined above, should it decide to act at all with respect to the matter.
Harris, 582 A.2d at 230-31 (citations omitted).
Thus, here, as in Harris, if demand is excused with respect to the Board in existence at the time of the filing of the First Complaint, the existence of a disinterested Board at the time of filing of the Second Amended Complaint affects only those claims not already validly in litigation. The first question I must answer is, therefore, whether plaintiffs have complied with Rule 23.1 with respect to the Board in existence in February, 1991.
B. Have Plaintiffs Complied with Rule 23.1 with Respect to the February 1991 Board for Those Actions Occurring Before that Date?
J.B. Fuqua, Johnson, Klamon, Sanders, Scott and Warner were the six members of FII's Board at the time the First Complaint was filed on February 22, 1991. In order for this Court to excuse demand on the grounds of demand futility, a plaintiff must show that the Board on which demand would have been made did not consist of at least a majority of disinterested directors. Plaintiffs' only surviving derivative claim alleges that the Board's decisions to exempt Triton from section 203 and to repurchase FII's stock were motivated solely by the defendants' desire to secure their positions in office. Five members of the demand Board, J.B. Fuqua, Klamon, Sanders, Scott and Warner were on the Board that made the decision to enter into the Section 203 Agreement and the Board that made the decision to repurchase FII's stock. Accordingly, with only one apparently disinterested member, demand upon the February 1991 Board to address the merits of plaintiffs' claim would have been futile and I deny defendants' motion to dismiss plaintiffs' derivative claims for failure to comply with Chancery Court Rule 23.1.
The First Complaint alleges that there were seven, not six members of FII's Board on this date. See First Complaint at 9. However, the First Consolidated Complaint makes it clear that Holder resigned in December, 1990. See First Consolidated Complaint at 8. Thus, there were only six members of the FII Board in February 1991.
VI. THE CLASS CLAIM
Plaintiffs' class claim may be read to allege three separate claims. The first, based on the defendants' breach of the fiduciary duty of disclosure, even if properly asserted as a class claim, fails to state a claim for which relief may be granted. The second, that the class was deprived of its right to lawful and informed elections, is based upon plaintiffs' contention that the members of the Board committee charged with nominating candidates for directors must be "disinterested." Plaintiffs state that "the requirement of an independent nominating committee arises from the 203 Agreement, not Delaware law." According to the complaint, the Section 203 Agreement requires only that FII's Board consist of a minimum of seven directors, of which three shall be disinterested, and that any business combination with Triton receive the approval of the majority of the disinterested directors. Finding no support for plaintiffs' allegation that the nominating committee must be "disinterested," I dismiss their claim that the class was deprived of its right to lawful and informed elections. Finally, plaintiffs make allegations that the defendants transferred control of FII to Triton and failed to take steps to ensure that the class was able to maximize the value of their stock. These vague claims, found only in the complaint and not addressed in plaintiffs' reply, fail to explain how Triton's open market purchases of FII stock, or FII's repurchase program, constituted an impermissible attempt to transfer control or how Triton's ownership of FII stock resulted in an ability to control FII. Consequently, I must dismiss this claim as well. Each of plaintiffs' class allegations fails to state a claim for which relief may be granted.
See text of this Opinion at 29-30.
Pls.' Memo. at 34.
Second Am. Compl. ¶ 50.
Id.
Counsel should confer and attempt to agree upon a form of Order that implements this decision.